As foreseen by IFRS 7, the following is a list of the goals and policies of PRIMA INDUSTRIE SpA and the other companies in the Group on the subject of risk management.
The financial instruments of the Group which are allocated for the purposes of financing operations include bank loans, financial lease contracts and factoring, sight and short-term bank deposits. There are also other financial instruments, such as trade receivables and payables, deriving from operating activities.
The Group also performed operations in derivatives, such as “Interest Rate Swap – IRS” contracts. The purpose of these instruments is to manage interest rate risks generated by the Group's operations and its loan sources.
The main risks generated by the Group's aforementioned financial instruments are interest risks, exchange rate risks, credit risks and cash flow risks.
The Group has applied a specific policy to manage financial risks correctly, with the purpose of safeguarding its business and its ability to create value for the shareholders and all the stakeholders.
As indicated in the Management Report, the PRIMA INDUSTRIE Group is mainly exposed in the following risks categories:
Interest rate risk Exchange rate risk Credit risk
91 The Group has applied a specific policy to manage financial risks correctly, with the purpose of safeguarding its business and its ability to create value for the shareholders and all the stakeholders.
The following table illustrates the goals and policies of the Group for management of the risks indicated above.
Interest rate risk
The position of indebtedness toward the credit system and capital market can be negotiated at fixed or variable rates.
The variation of interest rates on the market generates the following categories of risk:
an upward variation of market rates exposes the group to the risk of higher financial costs to pay on the amount payable at the variable rate;
a downward variation of market rates exposes the group to the risk of higher financial costs to pay on the amount payable at the fixed rate;
The strategies of the Group to meet these risks are as follows: Interest rate Management/Hedging
Exposure to the interest rate is structural in nature, as the net financial position generates net financial costs subject to the volatility of interest rates, depending on the contract conditions established with the financial counterparts.
Consequently, the strategy identified, consisting of Management/Hedging consists of: Continuous monitoring of exposure to interest rate risk
Activities of Hedging via derivative financial instruments Exchange rate risk
The position of indebtedness toward the banking system and capital market, as well as toward the other creditors, can be expressed in the group's own reporting currency (euro), or in other reporting currencies.
In this case, the financial cost of the payable in currency is subject to the interest rate risk of a market other than the euro market, that of the chosen currency.
The attitude and strategies to pursue toward the risk factors are determined by a number of elements that concern both the characteristics of the reference markets and their impact on the results of the corporate financial statements.
Four possible strategic orientations can be identified for operating management of the separate risk factors:
Avoidance Acceptance
Management/Hedging
“Market Intelligence” (Speculation)
The strategies of the Group to meet these risks are as follows: Exchange rate Management/Hedging
Exposure to the exchange rate risks deriving from financial factors is currently limited, as the company does not take out loans in currencies other than the euro, with the exception of a few loans in the U.S. pertaining to the subsidiary PRIMA North America, for which the U.S. dollar is the currency of reference.
Relative to trade items, however, the exposure to exchange rate risk is relatively limited at the Group level, as the trade flows in U.S. dollars (basically the only significant reporting currency other than the euro) of the parent company PRIMA INDUSTRIE SpA, of FINN- POWER OY and of PRIMA ELECTRONICS (that purchases a large quantity of parts in dollars) are balanced by the flows of the subsidiaries, PRIMA North America Inc. and FINN-POWER International Inc. which operate exclusively in dollars.
92 The Group therefore tends to minimize its recourse to financial markets for hedges due to the benefits deriving from this natural hedge.
In any case, PRIMA INDUSTRIE performs frequent monitoring to ascertain the existence of this natural hedge at the Group level. The Group therefore tends to minimize its recourse to financial markets for hedges due to the benefits deriving from this partial balance, that is subject to constant monitoring.
In terms of reporting currencies other than the US dollar, almost exclusively used by only a few subsidiaries performing sales and after-sales service activities, the risk management strategy is generally one of acceptance, because the amounts are generally not large, and because of the difficulty of finding adequate hedges.
Credit risk
The company deals only with known and reliable clients, moreover the receivable balance is monitored during the year so that the exposure to losses is never great. For this purpose, PRIMA INDUSTRIE recently established a function of Group receivable management.
It should be noted that part of receivables from clients are transferred to factoring companies.
There are no significant concentrations of receivable risk for the Group.
Financial assets are reported in the financial statements net of the write-down calculated on the basis of the risk of non-performance by the other party, determined on the basis of the available information on the solvency of the client and possibly considering the history.
The receivable risk regarding financial assets of the Group has a maximum level equal to the net book value of these assets in case of insolvency of the other party. For further details on this subject see “NOTE 8.8, TRADE RECEIVABLES”.
Liquidity risk
The liquidity risk is the risk that financial sources may not be sufficient to meet the financial and trade obligations of the Group within the terms and deadlines established for them. The liquidity risk to which the Group is subject may arise following delayed payments and, more in general, to the difficulty in obtaining financing to support operating activities in the necessary time. The cash flows, financing needs and liquidity of the companies in the Group are monitored or managed centrally, under the control of the Group treasury, with the goal of ensuring effective and efficient management of the financial resources.
The Group operates with a view to performing operations of collection on different financial markets and with different technical forms, in order to guarantee a proper level of liquidity currently and in the future. The strategic goal is to ensure that the company disposes at all times of sufficient credit to meet its financial obligations in the next twelve months.
The current difficult market context in operational and financial terms means that particular attention must be paid to managing cash flow risk, and in that sense, particular attention is devoted to those items tending to generate financial resources through general operational management and maintenance of an adequate level of available liquidity.
The Group therefore plans to meet its needs deriving from financial payables and programmed investments as they fall due, through the flows deriving from its operating management, available liquidity, use of credit lines, renewal of bank loans and if necessary, recourse to other forms of provision of an extraordinary nature.
93 The table below lists, for the assets and liabilities as of 31.12.10 and on the basis of the categories foreseen by IAS 39, the additional information on financial instruments pursuant to IFRS 7.
Amounts in thousands of Euros
Assets C ategory IAS 39 Financial value 31.12.2010 Amortized cost FV in equity FV in income statement IAS 17 31.12.2010 Fair value
Cash and cash equivalents NA 14.838 - - - - 14.838 Assets owned to expiry Held to Maturity - - - - - -
Assets at fair value reported in the Income Statement Held for Trading 2 - - 2 - 2 Assets valuated as per IAS 17 NA 1.997 - - - 1.997 1.997
Total 16.837 - - 2 1.997 16.837
Liabilities C ategory IAS 39 Financial value
31.12.2010 Amortized cost FV in equity
FV in income
statement IAS 17
Fair value 31.12.2010
Liabilities at amortized cost Amortised Cost 145.389 145.389 - - - 146.823 Liabilities at fair value in income statement Held for Trading 1.425 - - (116) - 1.425 Hedge derivatives NA 6.406 - 428 - - 6.406 Liabilities valuated as per IAS 17 NA 2.373 - - - 2.373 2.373 Other financial payables - factoring NA 514 - - - - 514
Total 156.107 145.389 428 (116) 2.373 157.541
Assets Category IAS 39 Net income interest
Cash and cash equivalents NA 91 91
Assets held to expiry Held to Maturity - - Assets valuated as per IAS 17 NA - -
Total 91 91